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Capella's (CPLA) Q1 Earnings Beat, Revenues Miss Estimates

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Shares of Capella Education Company gained 6.4% on May 2, following first-quarter 2018 earnings release.

The company reported adjusted earnings of $1.20 per share in the quarter, which surpassed the Zacks Consensus Estimate of $1.16 by 3.5%. In the year-ago quarter, earnings were 94 cents.

Revenues and Enrollment

Capella’s quarterly revenues of $112 million missed the Zacks Consensus Estimate of $113 million and increased a meagre 0.2% year over year.

Capella reports under two segments — Post-Secondary and Job-Ready Skills. The Post-Secondary segment comprises Capella University and Sophia Learning. The Job-Ready Skills segment covers Capella Learning Solutions, Hackbright Academy and DevMountain.

Post-Secondary: The segment reported revenues of $109.2 million, down 0.3% from the year-ago quarter due to a decline in enrollment. However, operating margin of 17.8% showed a year-over-year decline of 70 basis points (bps).

Capella University’s total active enrollment fell 1.6% to 38,181 learners, while new enrollment increased 1.8% on a year-over-year basis.

Job-Ready Skills: The segment reported revenues of $2.8 million in the first quarter, up 21.7% year over year. That said, the segment reported an operating loss of $1 million, compared with $2.7 million loss in the prior-year quarter.

Capella Education Company Price, Consensus and EPS Surprise

 

Margins

Operating income was $17.9 million, compared with $17.6 million in the prior-year quarter. The operating margin was 16%, up 30 bps. In the quarter under review, the company incurred merger transaction costs of $0.5 million.

Financials

As of Mar 31, 2018, Capella Education had cash and marketable securities of $192.7 million, compared with $181.4 million at 2017-end.

Cash provided by operating activities from continuing operations for the three months ended March 31, 2018 was $21.3 million compared with $17.0 million in the year-ago period.

No shares were repurchased in the first quarter of 2018. The company had $27 million of share repurchase authorization remaining as of Mar 31, 2018.

Capella-Strayer Merger

In October 2017, Strayer Education, Inc. and Capella announced an all-stock merger deal of equal transactions. The merger is expected to achieve annual cost savings of approximately $50 million, which will be fully phased within 18 months of closing.

Notably, the transaction is expected to close in the third quarter of 2018. Post completion, Strayer’s shareholders will own approximately 52% of the combined entity and Capella’s shareholders will own the remaining 48% of the company.  The combined entity will be renamed Strategic Education Inc. and its ticker symbol will remain STRA.

The combined company is expected to become a national leader in education innovation, wherein the companies will accelerate innovation in key products as well as services and return capital to shareholders through an expected annual dividend of $2 per share following the closure of the transaction.

The merger is expected to ensure students’ success and positive employment outcomes. The collaboration of the companies is expected to improve academic outcomes by combining each of the university’s competencies. The merger will facilitate a diverse product offering that will result in a more balanced revenue mix.

2018 Guidance

The company is focused on consistent revenue growth. To this end, Capella aims to achieve annual new enrollment growth along with stable or improving early cohort persistence and continued revenue growth in the Job-Ready Skills segment. Moreover, the company expects the Job-Ready Skills segment to be less dilutive in 2018.

Currently, the annual tax rate is expected to be slightly above 25%.

Zacks Rank

Capella carries a Zacks Rank #2 (Buy). You can see   the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Upcoming Peer Releases

American Public Education, Inc. (APEI - Free Report) is scheduled to release quarterly earnings on May 8, after the market closes.

Adtalem Global Education Inc. (ATGE - Free Report) and Universal Technical Institute, Inc. (UTI - Free Report) is scheduled to release quarterly earnings on May 3, after the market closes.

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